Wednesday, May 10, 2017

We are pleased to inform you that our Hidden Gem stock of November 2015 - Coral Laboratories Ltd (BSE Code: 524506) which was released on 06th Dec'15 is giving as on date returns of 105% to our Hidden Gems members. Our team suggested Buy on Coral Labs at price of Rs. 552.50 on 06 December 2015 with a target price of Rs. 1100. Stock has already achieved its target price recently and closed at Rs. 1134.20 today on BSE giving as on date returns of 105% to our Hidden Gems members in period of 1 year and 6 months.

In Dec'16 quarter, net profit of Coral Laboratories rose 62.38% to Rs 5.05 crore against Rs 3.11 crore during the previous quarter ended December 2015. Sales rose 25.28% to Rs 22.65 crore in the quarter ended December 2016 as against Rs 18.08 crore during the previous quarter ended December 2015

Below is the summary of Coral Laboratories Ltd shared by our team under Hidden Gem stock of Nov'15 released on 06th Dec 2015.

Note: This report is shared only for the purpose of information and not an investment advice. Kindly carry out your own due diligence in case of investment in Coral Laboratories.

1. Company Background:

Coral
Laboratories Limited was founded in 1994 and is engaged in pharmaceutical
business in India and internationally. Coral Laboratories Ltd (Coral Labs) is equipped with total three
ultra-modern strategically spread manufacturing units located in Daman,
Dehradun and Vasai, which are ideal for manufacture of around 400 generic
medicines on a significant scale in about 15 dosage forms. Coral Lab is among
the many companies with a large scale manufacturing portfolio and expertise.
All 3 state of the art manufacturing plants are with CGMP & FDA approvals.

The company’s product portfolio is composed of bacteria, biotic, inflammatory
and skin condition medicines, as well as protein supplements. It primarily
focuses on inflammatory, bacterial, biotic, protein deficiencies, and skin
conditions. The company principally offers Zest syrups/caps/drops, Moxbro
caps/tabs/dry syrups, and dedoxy/doxycycline capsules.

Mr. Navin B. Doshi
has been overall responsible for the operations and smooth functioning of
business of the company successfully and has been instrumental in achieving
substantial growth for the company as Director. Mr. Navin B. Doshi, founder of
Coral Labs, has over three decades of marketing experience in the
pharmaceuticals industry.

Coral
Labs has a wide range of drugs to offer from various segments, company offers
almost 450 SKUs as Non-Sterile products, 150 as Sterile products and 55 as OTC
& Nutraceutical products.

Coral Labs is making continuous efforts to enhance its exports in
order to drive revenue growth and profitability. The Company’s export has
increased to Rs.31.59 crores in FY15 from previous year of Rs. 25.59 crores registering
growth of 23%. In FY15, company’s exports contributed 50.9% of total revenue
compared to 49.2% in FY14. With management focus on driving exports in semi
regulated markets, we expect revenue from exports will increase significantly
during next 2 to 3 years.

According to India Ratings, a Fitch company, the
Indian pharmaceutical industry is estimated to grow at 20 per cent compound
annual growth rate (CAGR) over the next five years. Presently the market size
of the pharmaceutical industry in India stands at US$ 20 billion.Branded generics dominate the
pharmaceuticals market, constituting nearly 70 to 80 percent of the market.
India is the largest provider of generic drugs globally with the Indian
generics accounting for 20 per cent of global exports in terms of volume.

The domestic generic drug market is expected to cross $27.9
billion from the current level of $13.1 billion registering compound annual
growth rate (CAGR) of about 16.3 per cent particularly due toapproval accorded by USFDA makers and
21 drugs patent losing patent by 2019, according to a joint study by the
Associated Chambers of Commerce and Industry of India (Assocham) and RNCOS. The
major export markets for the country’s pharmaceutical products are Americas,
Europe, China, Japan, Africa, and others. The U.S. is single largest export
destination. It accounts for nearly 28 per cent of Indian pharmaceutical
exports, followed by the European Union (18 per cent) and Africa (17 per cent).
The pharma exports to the U.S. market are high due to the large number of
approvals from the USFDA.

According to a study on ‘Generic Medicines in India - Promulgating
Growth & Access , Generics would account for 85 per cent share in the
domesticpharma marketby 2020, fuelled by cheap labour,
patent cliff of blockbuster drugs and prevalence of lifestyle diseases. Generic
drugs account for 75 per cent of the domestic pharmaceutical market by value.
Drugs for cholesterol control, pain management, anti-coagulant, respiratory,
liver disorders, depression and lipid regulators are highly prevalent in the
global market.

As per CARE Ratings, the drug patent expiry in the USA will create new
opportunity for Indian pharmaceutical industry in the coming years and the
pharma industry will gain a larger foothold in the world's generic market. In
the long term, semi-regulated markets like Latin America, Africa and Asia may
offer the next growth avenues for Indian pharma companies as these markets have
high demand for drugs and relatively less stringent regulatory compliance
resulting in lower cost of servicing these markets.

ii) Increase in Share Holding by Promoters

During last 5 years,
promoters have increase their stake in the company by 10.29%, from 61.28% in
Mar’11 to 71.53% in Sep’15.

During
last 15 years, promoters have increased their holding in the company from a
meagre 15.05% in 2001 to the respectable 71.57% in 2015. Promoters buying own
company's share from the open market is a signal of highest commitment and
confidence in the company's business. From above, it is evident that promoters
of the company have steadily made purchases via open markets to increase their
stake in the company. Promoters buying shares from open market
adds comfort in terms of associated downside risk in stock price in case of
market correction.

At the end of Sep’ 15, promoter shareholding stands at 71.57%. FII
and DII investment is nil in the company.

Moreover, there has
been no equity dilution for the last 15 years, which is very impressive.
Company has not made any fresh issuances of equity capital and the equity capital
of Coral Labs is same at 3.57 crores since 2001.

Net profit of
Coral Laboratories rose 14.06% to Rs 2.84 crore in the quarter ended September
2015 as against Rs 2.49 crore during the previous quarter ended September 2014.
Sales rose 24.28% to Rs 18.07 crore in the quarter ended September 2015 as
against Rs 14.54 crore during the previous quarter ended September 2014

Coral Labs standalone
net profit rises 84.67% in the June 2015 quarter to Rs 2.77 crore in the
quarter ended June 2015 as against Rs 1.5 crore during the previous quarter
ended June 2014. Sales rose 21.82% to Rs 13.96 crore in the quarter ended June
2015 as against Rs 11.46 crore during the previous quarter ended June 2014.

In FY 14-15, company export sales grew by 23% compared to last
financial year and contributed 50.9% of total revenue compared to 49.2% in FY14.
As per our estimates, company export contribution will increase to 55% over
next 2 years.

Company has delivered
steady growth over last couple of years with continuous improvement in margins.
With management increased thrust on exports, we expect company will continue to
achieve robust top line and bottom line growth going forward.

4. Peer Group Comparison:(as on 06 Dec'15)

5. Key Concerns & Risks:

i) Coral Lab is
present in the generics segment of pharmaceutical markets in different
countries. Presence of many players in the
industry and offeringsof cheap
generic products from unorganized sector is always a riskfor the company.ii) Coral Lab
exports its Generic drugs to various countries like Sri Lanka, Myanmar,
Cambodia, Vietnam, Jordan, the Philippines, Afghanistan, Kenya, Nigeria,
Malawi, Chile, Cuba, Barbados, Jamaica, Ivory Coast, Costa Rica, Lesotho, Papua
New Guinea, Malawi, and Hong Kong , the governments of different countries
apply periodic price cuts on the pharmaceutical products so as to keep the
healthcare cost under control which can impact the margins of the company.iii) Stringent regulations
and quality standards are prescribed by the regulatory authorities across the
globe for the pharmaceutical products and their manufacturing and supply chain
processes in order to protect the interests of the patients. Any deviation from
the prescribed regulations or any variation in the quality from the prescribed
standards may lead to punitive actions by the regulatory authorities.

6. Saral Gyan Recommendation:

(as on 06 Dec'15)i) Coral Labs is having more than 2 decades of experience and offers
whole array of products which are decent on margins. As company exports to semi
/ less regulated markets and do not supply to the US, company does not have
risk associated with USFDA stringent norms and regulations. Company has shown
consistency in revenue growth with strong margins in recent years. With
increased focus of management on exports in semi regulated markets, we expect
net sales and PAT of the company to grow at CAGR of 20% and 26% respectively
during next 2 years.ii) The governments of various countries have been taking several cost
effective measures in order to bring down healthcare expenses. Thus,
governments are focusing on speedy introduction of generic drugs into the
market. This too will benefit Indian pharma companies. Coral Labs is among the
many companies with a large scale manufacturing portfolio and expertise to
offer generic drugs in different therapeutic segments.iii) Company has 3 state of the art plants with CGMP & FDA approvals.
Company has demonstrated healthy domestic growth as well in the past. In India,
company is doing well in the western and southern part. Company has complete
portfolio of injectable, syrups, cough syrups and tablets in antibacterial,
antibiotics segment and sells its products over the counter and on
prescriptions. Company manufacture around 400 generic medicines on a
significant scale in about 15 dosage forms.

iv) Company’s ROCE and
PAT margins have seen continuous improvement over last 5 years and expected to
further improve going forward considering robust revenue growth from exports as
well as domestic markets. We believe Coral Labs is getting into a trajectory
where business growth would be even faster. Company has achieved revenue CAGR
of 11.8% and profit CAGR of 15.43% during last 5 years. Moreover, company is virtually
debt free.

v) Promoters have increased their stake in the company by 5.75% in last 3
years which gives further confidence in terms of company’s future growth
prospects. As of Sept’15, promoter’s shareholding is 71.57% without pledging
any shares. FII and DII shareholding in the company is nil.vi) Management
has rewarded shareholders by paying consistent dividend since last 13 years. For
last financial year, company has paid dividend of Rs. 2.50 per share and dividend
yield at current market price is 0.45%. With expected increase in revenue and profitability
in coming years, we believe company dividend payout will increase going
forward.

vii) As per our estimates, Coral Labs can deliver PAT of 17 crores for
full financial year 2016-17, annualized EPS of Rs 47.6 with forward P/E ratio
of 11.6X for FY16-17. Company’s valuation looks attractive compared to other pharmaceutical
companies operating in the same segment. Moreover, Coral Labs can continue to
deliver consistent revenue growth with strong margins during next 2 years.viii) On equity of Rs. 3.57 crore, the
estimated annualized EPS for FY 16-17 works out to Rs. 47.6 and the Book Value
per share is Rs. 181.2. At current market price of Rs. 552.50, stock price to
book value is 3.05.

Considering
company’s steady growth with strong margins in past, increased thrust of management
on exports in semi-regulated markets and strong earning visibility with robust
business prospects, Saral Gyan team recommends “Buy” on Coral Laboratories Ltd at current market price of Rs. 552.50 for target of Rs.
1100 over a period of 12 to 24 months.

Buying
Strategy:

70%
at current market price of 552.50

30%
at price range of 450 - 470 (in case of correction in stock price in near
term)

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